Nudge the Crisis Away

In recent years, economic thinkers have embraced policies that “nudge” us into acting wisely. It’s time for European policy-makers to catch up.

At a time when the European Union wants to change the behavior of citizens to tackle a broad range of social problems, such as climate change, excessive drinking, obesity, and tobacco consumption, the EU should consider not only the social, economic and environmental impact of all policy options examined, but also their behavioral impact. This will enable the European Commission to not only foresee citizens’ reaction to a given policy option but also to design policies that actually take account of real-world behavior. After having relied on the assumption that it can only change people’s behavior through rules, regulations and incentives, it is time that the EU begun designing policies that better reflect how people really behave, not how they are assumed to behave.

Besides a few isolated initiatives displaying some behavioral consideration (e.g. revision of the tobacco products directive, consumer information regulation, behavioral advertising), the EU has not yet shown its commitment to integrate behavioral research into its policy-making. Given the potential of this regulatory approach in attaining effective, low-cost, and choice preserving policies, this outcome seems inadequate when measured against the EU’s commitment to smart regulation contained in the Europe 2020 Strategy. One way to take seriously the findings of behavioral research would be for the European Commission to introduce a behavioral test into its regulatory impact assessment system.

In recent years, findings in behavioral sciences have highlighted the complex cognitive framework in which people make decisions. In particular, behavioral economics, by refuting the neoclassical assumption of full human rationality, revealed a set of psychological biases, often called heuristics, capable of explaining why too often people make choices that seem to go against to their best interests.

Thus, for instance, due to the tendency of people to stick to the default option, inertia and ‘default rules’ have large effect on social outcome: unless you are automatically enrolled in a saving plan, you are unlikely to opt in. Framing and presentation can also influence individual behavior: when patients are told that 90% of those who have a certain operation are alive after three years, they are more likely to have the operation than when they are told that after three years 10% of patients are dead. In other words, choices are not only made on the basis of the expected outcome but tend to be affected by the relevant frame. Similarly, information that is vivid and salient can have a greater impact on behavior than information that is statistical and abstract: pictorial warnings on tobacco products produce greater dissuasive effects than text warnings. Finally, in multiple areas, individual behavior is largely influenced by the perceived behavior of other people. In particular, perception of the social norm in a given community may affect risk-taking, vis-à-vis – for instance – tobacco, drug and alcohol consumption.

These findings have important implications not only for the well being of European citizens but also for regulatory policy. While advertisers and marketers have exploited for years these patterns of irrationality to promote sales, public authorities are new to the game. Under both Barack Obama and David Cameron, policy makers have recently been encouraged to draw on behavioral and social sciences insights in the design or implementation of new regulations, an approach commonly called ‘nudge.’

Inspired by ‘libertarian paternalism’, it enables the creation of public policies that steer citizens towards making positive decisions as individuals and for society while preserving individual choice. Acting as ‘choice architects’ policy makers organize the context, process and environment in which individuals make decisions. Thus, placing an emoticon (sad face) on a prohibitive energy bill has the potential to nudge consumers towards less energy consumption. Rearranging the display of food makes it more likely that the healthy option is chosen. Switching from an ‘opt-in’ to an ‘opt-out’ system for organ donation may increase the number of organs available thus saving lives.

Although the results of the first nudging experiments are mixed, there seems to be an emerging consensus around the idea that regulation cannot work effectively or efficiently if regulators do not consider how people respond to their measures.

This article has been co-published with the EUROPP blog, a project of the Public Policy Group at the London School of Economics. For more analyses and comments on European issues, visit the EUROPP blog.

Read more in this debate: Deirdre McCloskey, Barry Schwartz, Dan Ariely.

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